TL;DR: We will discuss why copying trades from billionaires and institutions often doesn’t yield the same results. We will also show you a better way to minimize drawdown and maximize growth by blending technical analysis into your trading decisions.

Warren Buffett, the legendary billionaire investor, once experienced a significant loss of 65% on an investment he made in 2021.

This may come as a surprise considering his renowned value investing philosophy. So, how did he end up with such a high maximum drawdown?

For retail traders who simply copy trades from billionaire investors like Buffett, this can be a nightmare. However, there is a trading strategy that can help you avoid falling into this trap and enable you to buy stocks at a fair price, even at a 60% discount compared to Warren Buffett.

If you think you can achieve the same level of wealth as Warren Buffett by copying his trades, you are mistaken.

In this blog, we will discuss why copying trades from billionaires and institutions often doesn’t yield the same results. We will also show you a better way to minimize drawdown and maximize growth by blending technical analysis into your trading decisions.

The NuBank Investment by Warren Buffett

Warren Buffett is often seen as a role model for traders and investors due to his success in the stock market. Many people try to emulate his investment strategies. However, blindly copying the trades of institutional-level investors like Buffett may not always lead to the desired results.

Buffett’s billion-dollar investment in NuBank caught the attention of many investors. He purchased it at an average price of $9.38. However, the stock price continuously dropped after his purchase, reaching a low of $3.26, which is a massive 65% decline from his purchase price.

Although the stock has since increased by 165% from its historical low, not many retail traders could withstand such a drawdown and ended up exiting early at a loss.

Did Warren Buffett Make a Mistake Here?

Absolutely not.

When we analyze Buffett’s portfolio allocation, we find that he allocated only 0.24% of his entire portfolio to NuBank. This clearly shows that Warren Buffett only risks a very small amount of his portfolio on new emerging markets and companies to test how they perform.

Retail traders who didn’t look into the details often over-allocate their risk and portfolio into a trade, which can never yield the same results.

Here Comes the Importance of Portfolio Allocation

The purchase price of a security is just one aspect to consider when copying an investor’s trades. The percentage of portfolio allocation is equally crucial. As long as the portfolio allocation remains the same as the billionaire investor, it may seem reasonable to follow their lead.

However, billionaires operate at different levels of the wealth ladder, making it challenging for retail investors to perform at the same leverage.

Billionaires like Buffett can afford to lose small bets on emerging stocks, while retail investors who invest a significant portion of their portfolio cannot stomach the same level of risk. Additionally, billionaires have the luxury of waiting for extended periods, whereas retail investors may not have the same financial flexibility.

Always consider your own financial situation and risk tolerance before blindly copying the trades of institutional-level investors.

Blending Fundamental Analysis with Technical Analysis

Retail investors who have full-time jobs may not have enough time to track the market efficiently.

Additionally, they may be left in the dark, trying to coat-tail trades that are often delayed by a quarter of time. So, how can retail traders better navigate the market of value investment with better entry and exit points?

The answer lies in technical analysis.

We understand that becoming proficient in technical analysis requires time and effort. That’s why we have developed the TradeDots indicator to provide unique insights to traders.

TradeDots bridges fundamental analysis and technical analysis by effectively identifying market reversals through price action patterns. The higher the timeframe, the more accurate it is.

This makes it the perfect tool for traders who want to invest in assets for the long term but don’t have the time or knowledge to identify favorable entries.

In the case of NuBank, traders using the TradeDots indicator after the news release could have bought at a minimum of a 15% discount and a maximum of a 60% discount compared to Warren Buffett.

Regardless of the entry points, all the TradeDots signals are currently in the positive territory, with a maximum price increase of 120%.

The same strategy applies to assets like Apple, Mastercard, or even Bitcoin. By choosing assets with strong fundamentals, we can then look for an entry point using the TradeDots technical analysis tool.

By combining the best of these two different research and trading strategies, we can easily develop a profitable trading strategy that doesn’t require constant monitoring.

Bottom line

While it may be tempting to copy the trades of successful investors like Warren Buffett, it’s essential to consider the limitations and differences between their strategies and our own financial situations.

Blindly following institutional-level investors may not always lead to the desired outcomes. Instead, retail investors can explore alternative tools, such as quantitative trading indicators, to make more accurate decisions about when to enter and exit the market.

By understanding the nuances of investing and tailoring strategies to individual circumstances, investors can increase their chances of success in the stock market.